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Home is where the Hedge is.

The Bank of Canada posted 4.7% as our current rate of inflation. Up steeply from the preferred 2%, and apparently, not as “transitory” as their economists predicted.Your hard earned pay check buys less every week, as the affordability gap widens in a compounding cycle of low inventory spurred price increases. Almost everything is
transitory if you wait long enough, and Canadians could be waiting up to two years or more for a return to a healthy inflation level.

It is unfortunate, but no secret, that the cause of the inflation we are experiencing is from flawed Liberal financial policy of printing money during a time of increased borrowing at historic low interest rates, amid manufacturing slow downs. Add to that supply chain port bottlenecks, low commodity counts and hyper inflated shipping costs, and the combination is the perfect storm for hyper-inflation to goad price increases causing extreme hardships, lasting longer than any short term benefits from stimulus cheques.

Can the average household keep solvent for the next two years while paying so much more for everything? Factor in, that the BOC is poised to raise interest rates several times in 2022, causing already debt burdened households and businesses to hold that debt longer and pay it off much slower. We have already seen hyper-inflationary price increases in many sectors; shipping, lumber, gasoline, heating fuel, and the leader of the pack, real estate. An impoverishing trend that has a huge demographic priced out of home ownership, at a time when becoming a homeowner could help to hedge any hard earned wealth they have earned.

During periods of high inflation, citizens and investors buy hard assets that will tend not to loose value. Precious metals, some bonds, commodities, and real estate have in past been preferred as hedge investments. In theory, the hard asset you purchase as a hedge will retain or even gain in value while you own it. Real estate is not the most liquid form of financial hedge, meaning that it takes time to get your investment back. And you can’t typically sell it overnight like bars of gold, but it has long been a hard asset that gains steadily in value.

The average household spends 45.9% of their monthly income on housing, so if 50% of your earnings are paying a low fixed rate mortgage and building equity in an asset that will appreciate, your earnings are more protected from the devaluation of the dollar.

If you have the cash or down payment and approved financing to buy a home or property while interest rates are still at rock bottom, it makes sense to go forth and find your new home as quickly as you can. But, make sure you are very thorough in your assessment of the properties true value. Do your own risk assessment and calculate outcomes associated with where we are at in this booming real estate cycle. This is even more critical if you are purchasing for purely investment purchases as the home will not be your principal residence and you are counting on the future ROI sooner.

If the home or property you purchase is extremely overvalued and we see a sharp market correction, the value of your investment will slip and your equity in mortgage payments will not make up for the shortfall for many years, or until the market cycle comes around to boom again.

A real estate hedge is just one preemptive strategy to beat inflation in the long term. Homeowners are choosing to refinance mortgages early, before rates rise, to make sure that they are at the lowest possible payment for the longest term.

Paying down as much debt as possible, starting with floating variable rate LOC’s and unsecured credit cards is a must. Households with high debt loads will be overwhelmed when their income will not spread thin enough to keep up with anymore than minimums, and the longer it takes to pay off credit debt, the more you pay in interest charges while the principal debt grows out of control.

Home heating costs were predicted to be 40-50% higher this winter, and thousands of homeowners chose to purchase wood stoves or take out gas inserts and reinstate their wood burning fireplace to reduce heating bills. A great plan, if you can source & cut and store a winters supply of wood. The immediate demand for firewood drove up prices of a seasoned cord to over $350, making it an equally pricy heat source if you purchase 5 or more cord annually.

Produce everything that you can yourself. If you can make it, or bake it, or grow it at home – don’t buy it!

Self sufficiency is the ultimate inflationary defence. I have many clients who have set themselves up on rural properties so they are able to raise their own animals for meat, grow gardens for vegetables and mill their own lumber on portable saw mills. This is a growing lifestyle trend, living a sustainable hobby farm lifestyle can keep your standard of living at a level that others will eventually struggle to retain.

Beating inflation in an urban setting looks like back yard & balcony gardens, bulk buying, preserving, using public transit or doing away with your data plan to go to wifi only. Prepare for hard times and be hands on in your approach to make sure your household comes out ahead!

Monetary policy makers have ensured less of your income will be spent to help the economy grow for quite some time, so make sure your pay check is still helping you grow towards achieving estate goals and financial security.

Freddy & Linda Marks, 3A®Group RE/MAX Nyda Realty

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